The sheer size of the SMB market combined with surging demand and still-low penetration rates represents a tremendous growth opportunity for the payroll software market.

Small companies are big business. They employ nearly half of the U.S. workforce and make up 99.9% of all businesses by count. But for many of today’s small and medium-sized businesses (SMBs), paper-based and manual payroll processes just don’t cut it anymore, especially as the remote workforce grows following the pandemic.

The growing sophistication, accessibility and affordability of technology solutions is pushing smaller companies to embrace automated and cloud-based payroll software. At LLR Partners, we’ve been investing in HR technology and services for over a decade. As these trends become more pronounced, we see tremendous growth opportunities in the SMB payroll software market for technology providers who can differentiate in an increasingly crowded market.

A quick look at SMB payroll software market trends

Advances in HR technology have dramatically raised expectations for both managers and employees. The demand for self-service portals is rising, as is the want for seamless integration with other HR functions.

SMBs have become more aware of potentially costly risks associated with payroll compliance. Many SMBs struggle to navigate complicated tax issues, legislation changes and industry-specific requirements. In fact, the IRS estimates that 40% of SMBs in the United States are penalized each year for failing to meet payroll tax requirements, with an average penalty paid of $845. That equates to billions of dollars.

The sheer size of the SMB market combined with surging demand and still-low penetration rates represents a tremendous growth opportunity for the payroll software market. However, it also is a crowded space, with scores of fast-growing small players vying to take market share from a handful of dominant players like ADP and Paychex.

Four ways payroll software providers are differentiating themselves from the pack:

Focus on Customer Service

Many SMB-focused payroll providers position themselves against their larger competitors by promoting a superior level of customer service, care and support that conglomerates just cannot offer. So it’s no surprise that customer service is often a meaningful driver of an SMB’s decision around payroll software solutions.

“Processing payroll is the same no matter which software it is, but it will all depend on your relationship and how easy it is to do business with that company and your account manager.”

– Susan Stone: Corporate Controller, Azalea Health (LLR portfolio company)

Our research also shows that poor customer service and support is the number one reason customers change payroll service providers. As a result, customer service represents one of the biggest opportunities for emerging payroll software leaders to take market share from legacy vendors. Slow response times and poor problem-solving abilities are among the chief complaints for both HR departments and employees alike.

Payroll software firms can stand out by offering support and solutions through an array of contact options — call centers, email exchanges, live chats and chat bots — and making some or most of those options available 24/7. Regarding chat bots and live chat functions, many are based on script, so keep in mind the legitimacy, timeliness and helpfulness of the responses. These factors are also, if not more, important.

Bolstering UX with Integration Strength

It almost goes without saying that user experience is critical, but we’ve found that differentiation within UX is highly nuanced. The emerging leaders in the payroll software market are the ones really focusing on getting the user experience right.

Self-service portals have become increasingly important to the employee experience, and the ability to integrate with other HR solutions is key. Automation technology is also a growing focus, with artificial intelligence and machine learning allowing for instant prediction, detection, and correction of errors. There is little opportunity to differentiate on payroll processing and the calculation engine technologies alone. These capabilities are a baseline that every payroll software provider must have to garner serious consideration.

HR administrators need to easily and intuitively generate reports and run analytics across HR functions, such as budgeting, attendance, compliance, payroll errors and payroll cycle speed.

Integration is another area of differentiation. While HR buyers often prefer to purchase full-service suites, they have generally accepted that the integration of best of breed solutions across Human Capital Management (HCM) services can yield a better result. About 80% of businesses now use multiple vendors to address their HR needs, such as applicant tracking, performance management, time and attendance, benefits administration and human resources information systems (HRIS).

This makes the strength of integration capabilities especially important. Employees and administrators both prefer to feel as though they are working within a single system or interface without having to jump from one to another. Being able to generate reports and run analytics across HR functions, such as budgeting, attendance, compliance, payroll errors and payroll cycle speed is key.

Those that can seamlessly integrate with a large pool of other HR tools have managed to create incremental added value that SMBs notice. Smaller payroll software firms have a unique ability to outperform here by offering greater flexibility and attention to tackle specific client integration needs.

Embrace Sales Partnerships

When done well, establishing partnerships for referrals from other HR tech offerings or sales partnerships with outsourced service providers can create a significant advantage for vendors competing against the many peers in the payroll software market.

In particular, payroll service providers continue to be a meaningful component of the SMB payroll ecosystem, as many smaller companies do not have in-house teams, and they generally view services from standalone providers more favorably than those offered by large, all-in-one vendors.

These service providers can be a rich referral channel for new potential clients. Many HR outsourcing firms have favorite payroll software solutions and will refer those with whom they prefer to interact to their SMB clients.

“At the end of the day, the [HR service provider] decision came down to ancillary benefits; our platform used to be very disparate, with our payroll provider in one place and then flex spending accounts, our 401k provider, and other critical HR tools not communicating with each other.”

Sarah Kornhaber: Senior Director of People and Culture, LLR Partners


Explore Sector Expertise

Pay structures for SMBs across many industries are fairly uniform, based on salary or an hourly wage. But there are dozens of industry verticals with unique payroll requirements that can spur headaches — and severe compliance issues — if not properly and fully accounted for. The food service and hospitality industries, for instance, have numerous tipping regulations, varying pay rates for the same employee filling multiple job functions, and higher-than-average turnover rates, all of which introduce complexities into the payroll process.

Other industries, including construction, healthcare, and entertainment & media, also have unique characteristics that make payroll compliance more difficult, and as a result more prone to risks that can lead to significant payroll penalties.

Sometimes, large payroll solutions providers do not adequately address the needs of businesses in these unique industries, and they are unlikely to do so given the level of specialization required and the size of each market.

“If the provider is huge, probably anybody in support can answer my questions, but they should have an understanding of what could or couldn’t be the problem to be able to answer me. It’s not just about having a response; it’s about having a legitimate response to customer queries.”

– Susan Stone: Corporate Controller, Azalea Health (LLR portfolio company)

As a result, some smaller payroll software providers are taking advantage of this game — and in doing so offering a key differentiator — by building out vertical-specific HR platforms with payroll at its core, leveraging industry knowledge and distinct payroll requirements to differentiate.

Here’s the bottom line.

The opportunity for growth and investment in the SMB payroll software market has been maturing for several years, but coming out of COVID with an increasingly remote workforce, it is now stronger than ever. Competition in a crowded marketplace is an issue, but smaller, high-growth firms have several avenues to differentiate, including customer service, integration capabilities, sales partnerships, and sector expertise. These differentiating factors are nuanced, but they matter to SMB clients, and can mean the difference between software companies getting lost or rising above the pack.

For inquiries about the SMB payroll software market, email me at